JetBlue & Southwest’s Net Rises On Gains From Capacity Expansion

JetBlue‘s (NASDAQ:JBLU) fourth quarter revenues and profits surged sharply on gains from capacity expansion. The low cost carrier’s revenues rose by 14% annually to $1.4 billion and its profits rose to $47 million in the fourth quarter, from $1 million in the year ago period. [1] The carrier’s profits in the fourth quarter of 2012 were impacted by Superstorm Sandy. In comparison, its fourth quarter 2013 results benefited from stable demand for flights which allowed it to raise its flying capacity as well as achieve higher passenger yields on fare hikes.

Looking ahead, the carrier expects its 2014 first quarter results to be impacted by severe weather experienced in the northeast U.S. at the start of this year. JetBlue in its earnings release said that it cancelled approximately 1,800 flights during that period due to inclement weather conditions. As a result, growth in its flying capacity and passenger traffic will be hit in the first quarter and its revenues for the period will be reduced by an estimated $45 million. This decline in the carrier’s top line will also weigh on its first quarter profits as many costs including wages are fixed. Nonetheless, JetBlue plans to continue to grow its flying capacity in 2014 by around 5-7% year-over-year, to drive growth in its passenger traffic and revenues. [2]

We currently have a stock price estimate of $9 for JetBlue, marginally above its current market price. We are in the process of incorporating fourth quarter earnings and shall update our analysis shortly.

In the fourth quarter, backed by stable demand environment, JetBlue expanded its flying capacity by 8% annually, focusing on the Boston, Latin and Caribbean markets. This raised its passenger traffic by over 7% annually. [1] Coupled with higher passenger yields – amount collected from each passenger for a mile of flight – driven by fare hikes on some routes, JetBlue’s revenues rose significantly in the fourth quarter.

Slower Growth In Maintenance Costs Helps Ease Pressure On Profits

The carrier’s profits also benefited from lower maintenance and repair costs. In the first nine months of 2013, JetBlue’s airplane maintenance and repair costs rose by 30% year-over-year, far outweighing the single-digit growth in its top line. [3] In the fourth quarter, this rise in the carrier’s maintenance costs moderated to 23%, easing pressure on profits. [1] Airplane maintenance and repair costs for JetBlue increased sharply in 2013 as its planes, which are among the youngest in the U.S. airline industry, entered a phase that required heavier, and frequent checks and repairs.

Southwest’s Fourth Quarter Earnings

Separately, Southwest‘s (NYSE:LUV) fourth quarter revenues and profits also rose on higher passenger traffic driven by capacity expansion. The carrier’s revenues grew by 6% annually and its profits more than doubled to $212 million in the fourth quarter, from $78 million in the prior year quarter. [4] In all, Southwest capped off a strong 2013 with impressive fourth quarter results. For full year 2013, on gains from capacity expansion, the carrier’s revenues rose by 3% annually to a record $17.7 billion, and its profits jumped to $754 million from $421 million in 2012. ((Southwest’s 2013 Q4 earnings form 8-K, January 23 2014, www.swamedia.com))

AirTran Integration On Track

In its earnings release, Southwest also said that in 2013, it realized its targeted $400 million in synergies from the AirTran integration. During the year, Southwest transitioned 13 of AirTran’s Boeing 717s to Delta (NYSE:DAL) and removed an additional nine of its 717s from active service. The carrier replaced their flying with Boeing 737s, which prior to the 2011 AirTran acquisition, were the only aircraft type flown by Southwest. The remaining 66 717s from AirTran fleet are expected to be removed from service by the end of this year and transitioned to Delta through 2015. As in 2013, these 717s this year will be replaced by new and pre-owned 737s. We figure this return of Southwest’s fleet to operation of a single aircraft type – the Boeing 737 – will help reduce its costs through lower inventory and spare part management costs, as well as simplified scheduling and personnel training.

Unlike JetBlue, which in 2014, will drive its growth through capacity expansion, Southwest expects its 2014 capacity to remain relatively flat as it takes out 717s from its fleet and replaces them with 737s. In our opinion, Southwest’s 2014 profits will grow on gains from lower cost structures arising from the operation of a single aircraft type.

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